IP: Patent Holders Score Victories in Qui Tam Lawsuits

A previously little-used provision of the Patent Act has provided the fodder for hundreds of qui tam lawsuits filed over the last few years by plaintiffs seeking a windfall from manufacturers failing to remove expired patent markings on their products. The basis for these lawsuits is the provision in Section 292 of the Patent Act that provides a penalty for false marking of not more than $500 "for every such offense."

In 2009, the Federal Circuit, in Forest Group Inc. v. Bon Tool, added fuel to the fire holding that every falsely marked product (not just every make or model of a product, but every product sold) constitutes an "offense" under Section 292. Thus, the stakes in these cases escalated tremendously. In Pequignot v. Solo Cup Company, for example, Solo Cup was accused of falsely marking over 21 billion cup lids with two expired patent numbers. The plaintiff thus sought an award of $500 for each falsely marked lid or, as the Federal Circuit would later point out, an "award to the United States of approximately $5.4 trillion [and what] would be sufficient to pay back 42% of the country's national debt." To say the least, these cases have gone far beyond the intent of the statute.

While the actual penalty any court may impose in any given circumstance remains uncertain (the Federal Circuit in Forest Group, for example, stated that the courts have discretion to impose penalties that may be only "a fraction of a penny"), two main defenses to the qui tam false patent marking cases have been successfully pursued: the lack of standing based upon the lack of any injury-in-fact, and the lack of any intent to deceive. Congress has also introduced legislation that may reduce or eliminate the filing of these cases.

On August 3, 2010, a decision was rendered in United States of America, et. al., v. WHAM-O, Inc., from the Western District of Pennsylvania, in which it was noted that "district courts in different circuits have considered the threshold constitutional standing issue in the context of Section 292 qui tam actions involving third party entities which have suffered no injury-in-fact but seek damages and attorneys fees for false marking," noting a split on rulings. In that case, the court granted defendant's Motion to Dismiss for lack of standing "because neither [the plaintiff corporation] nor the United States has suffered any concrete injury-in-fact, and the government cannot assign its 'sovereign injury' to a private plaintiff." Similarly, in an August 5, 2010 ruling from the Central District of California, the Court dismissed a case stating that Plaintiff had "fail[ed] to allege any cognizable injury to the United States or the public, much less adequate factual pleadings to support a concrete, particularized injury that is actual or imminent. Therefore, Plaintiff lacks sanding to pursue the penalties imposed by Section 292."

The Federal Circuit presently has before it the opportunity to clarify the law in this area. In particular, on August 3, the court heard oral arguments in Stauffer v. Brooks Brothers, Inc., as to whether the plaintiff, an individual patent attorney, had constitutional standing to bring an action under Section 292. The plaintiff is appealing the dismissal of that case from the Southern District of New York based on Stauffer's failure to allege that Brook Brothers' "conduct had caused an actual or imminent injury in fact to competition, to the United States economy, or the public that could be assigned to him as a qui tam plaintiff or be vindicated through this litigation. Stauffer therefore lacks standing to proceed."

With regard to the requirement in Section 292 that patent mismarking must be "for the purpose of deceiving the public," the Federal Circuit in the above referenced Pequignot v. Solo Cup Company case affirmed the grant of summary judgment for the defendant holding that the plaintiff had not shown any requisite intent by Solo Cup to deceive the public by falsely marking its products. The court found that Solo Cup sought and relied on the advice of its counsel in determining whether it needed to stop marking its products with the expired patents. The Court also found that, on the advice of counsel, Solo Cup had developed a policy of replacing the expensive machinery used for manufacturing and marking its products as it became worn or damaged with machinery that deleted any expired patent numbers.

Not to be left out, Congress has introduced legislation which may eliminate many of the qui tam false patent marking cases. The proposed Patent Reform Act of 2010 modifies Section 292 to allow these cases to be brought only by persons who have suffered a "competitive injury" as a result of the false marking. If and when this legislation will be passed however is still very much in question. The amendment to the Patent Act as currently drafted, is intended to apply retroactively.

Patent marking can provide significant benefits in giving constructive notice of patent infringement and providing an early date from which damages for patent infringement can accrue. We also anticipate that the proliferation of qui tam false patent marking cases will slow and soon come to an end, through limiting court rulings or Congress. Nevertheless, companies need to closely monitor the patent marking that is made and to assure, with counsel, that marking is accurately done in compliance with Section 292 of the Patent Act.

Allan Sternstein is the director of the Intellectual Property and Intellectual Property Litigation Department in the Chicago office of Dykema.

Michael Stolarski is a member in the Intellectual Property Department in the Chicago office of Dykema.